He also spoke to leading members of Congress to urge them to approve the bailout. But even he couldn't stave off the depressing impact of a bank freeze on lending and a growing belief of a possibly terrible disaster if the $US700 billion bailout fails.
But here are a couple of quotes from the new book on Warren Buffett called Snowball, by Alice Schroeder that show that as early as March of this year, when Bear Stearns was rescued by JPMorgan, with a $US29 billion loan from the Fed, he could see worse to come, especially for the US economy.
It's of interest that while he could see through the mists of confusion at the time, many others in the US, from Government and regulator to participant and investor, couldn't or wouldn't.
What squares the circle is that last Friday, our time, JP Morgan rescued Washington Mutual, America's largest Savings and Loan after a 10 day, $US16.7 billion run sank it. The first is from the second except on the Financial Times website
"Seventeen years later, in the weeks after the US investment bank Bear Stearns had to be rescued, Buffett reflected on his own close encounter with a meltdown on Wall Street: "The speed with which fear can spread – nobody has to have an account at Bear Stearns, nobody has to lend them money. It's a version of what I went through at Salomon, where you were just inches away all the time from, in effect, and an electronic run on the bank. Banks can't stand runs.
"The Federal Reserve hasn't bailed out investment banks before, and that was what I was sort of pleading back there in 1991 with Salomon. If Salomon went, who knows what kind of dominoes would set off. I don't have good answers to what the Fed should do. Some parts of the market are pretty close to paralysed. They don't want contagion to spread to what they would regard as otherwise sound institutions: if Bear fails and two minutes later, people worry that Lehman fails, and two minutes after that they worry that Merrill will fail, and it spreads from there."
And this other quote from the book, taken from a review published in the Weekend edition of the FT: It's Buffett speaking after the rescue of Bear Stearns: "It could all end on a dime if they flooded the system with enough liquidity", he tells Schroeder, "but there are consequences to doing that. If dramatic enough, the consequences would be the immediate expectation of huge inflation. A lot of things would happen that you might not like. The economy is definitely tanking. It's not my game, but if I had to bet one way or another – everyone else says a recession will be short and shallow, but I would say long and deep." And that is what is gathering pace in the US right now: a "long and deep" recession; a forecast made six months ago!
The rescue bailout package is now being sliced and diced by politicians more interested on the part of the Republicans in avoiding blame for the disaster and rediscovering some ideological objection to government involvement in the economy; this from a bunch of gainsayers who have presided over the greatest debasement of the US dollar since the Bush tax cuts started in 2001-02. The US deficit has ballooned, and before the bailout, was heading past $US500 billion in the 2009 year. The Democrats aren't any better. They took time out this week to negotiate a massive spending bill with the same people now opposing the bailout.
That bill will fund the Pentagon and defence, allow oil drilling in US offshore waters in the Lower 48 states and will allocate tens of billions of dollars for pet spending projects for all members of the Congress, from the lower house and the Senate collectively.
It will keep the money going for the US Government over the next six months while the Administration changes, but it won't do a thing to tackle the biggest and most immediate problem: the imploding US financial system.
After the financial system, it's the economy that needs attention: very soon, as early as this Friday, the rising cost of the slump and the impact of the failing financial system, will be seen in a sharp rise in US unemployment last month.
Estimates from a Reuter's survey suggest that the number of jobless could have risen 100,000 or more last month, which would take the losses so far to over 700,000 and accelerating. Revisions to previous months could boost that figure. The unemployment rate is tipped to remain at 6.1%, but economists missed that sharp rise in July to that level, so it could very well happen again.
Friday saw a sharp cut in the annual rate of growth in the US economy in the second quarter. The third estimate put the annual rate at 2.8%, down from the surprisingly high 3.3% in the second estimate, but still above the initial stab in the dark of 1.9%.
While better than the contraction in the last quarter of 2007 and the rise of 0.9% in the first quarter, the latest estimate was reduced for worrying reasons. US Commerce Department estimates revealed the reasons for the downgrade were lower than expected consumer spending and US exports, both of which didn't grow as much during the three months to June than previously estimated.
The figures show consumer spending rose, thanks to that huge tax rebate, by an annual 1.2% rate, down from the 1.7% growth rate estimated previously. Exports jumped by a still strong 12.3% yearly rate in the quarter, lower than the second estimate of 13.2%, but up from the 5.1% rate in the first quarter.
Since the end of the quarter home sales and building have fallen (home building shrank by over 13% in the quarter, better than in the previous two quarters, but still a big negative), retail sales have turned down, industrial production and durable goods orders have fallen and business inventories have risen. And the global economy has slowed noticeably, especially in Europe and Asia where US exports have been strong.
Finally here's something for all investors to chew on. Reuters now forecasts a very sharp fall in third quarter earnings for S&P 500 companies, which is due to start in the next week or so.
"At this time, the estimated growth rate for the third quarter of 2008 stands at -1.7%. On April 1st, the estimated growth rate for the third quarter was 17.3%. "The decline in the third quarter growth rate during the past week (to -1.7% from -0.3%) can be attributed in part to downward estimate revisions in the Energy and Financials sectors.
"The growth rate for the Energy sector dropped to 57% from 59% during the past week. Companies in the sector that recorded downward estimate revisions over this timeframe include Chevron, ConocoPhillips and ExxonMobil.
"The growth rate for the Financials sector dropped to -59% from -55% during the past week. Companies in the sector that recorded downward estimate revisions over this timeframe include American International Group (AIG), Merrill Lynch and XL Capital.
"Since the start of the quarter, most of the decrease in the third quarter growth rate (to -1.7% from 12.6%) can be attributed to downward estimate revisions in the Financials sector. "At the industry level, the aggregated net income for companies in the Diversified Financials (-$3.8 billion), Investment Bank & Brokerage (-$7.3 billion) and Multi-line Insurance (-$4.7 billion) industries has decreased by $15.8 billion."
Realism is spreading.
